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Ruling
Subject: Sovereign immunity
Question 1
Are the portfolio interest and portfolio dividend income derived by X via Y Australia Trust exempt from withholding tax pursuant to the doctrine of sovereign immunity?
Answer
Yes. The portfolio interest and portfolio dividend income derive by X via Y Australia Trust will be exempt from withholding tax pursuant to the doctrine of sovereign immunity.
This ruling applies for the following period:
1 July 2011 to 30 June 2015
The scheme commences on:
1 July 2011
Relevant legislative provisions
Taxation Administration Act 1953 Subsection 15-5(2).
Explanation:
Certain income derived from within Australia by foreign governments is exempt from Australian tax under the international law doctrine of sovereign immunity. In accordance with that doctrine, Australia accepts that any income derived by a foreign government from the performance of governmental functions within Australia is exempt from Australian tax. An activity undertaken by a foreign Government Agency will generally be accepted as the performance of governmental functions provided that it is functions of government, provided that the agency is owned and controlled by the government and does not engage in commercial activities.
When determining whether sovereign immunity applies to a particular operation or activity, it is necessary to establish whether the operation or activity is commercial in nature. Whether an operation or activity is commercial in nature will depend on the facts of each particular case. However, as a guide, a commercial activity is generally an activity concerned with the trading of goods and services, such as buying, selling, bartering and transportation, and includes the carrying on of a business.
Income derived by a foreign government or by any other body exercising governmental functions from interest bearing investments or investments in equities is generally not considered to be income derived from a commercial operation or activity. Accordingly, provided the funds used to make such investments are and remain government moneys, the income is accepted as being exempt from tax under the common law doctrine of sovereign immunity.
In relation to a holding of shares in a company, there would be instances where the extent of the holding gives rise to questions as to whether it constitutes a passive investment or the carrying on of a business, but this would depend on the particular circumstances. A portfolio holding in a company (i.e., a holding of 10 per cent or less of the equity in a company) will generally be accepted as a non-commercial activity and any dividends received from such a holding would be exempt from tax. To establish that sovereign immunity applies to exempt dividend and interest income from withholding tax, it is necessary to establish the following:
· that the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government;
· that the moneys being invested are and will remain government moneys; and
· that the income is being derived from a non-commercial activity.
If these three conditions are satisfied, then the dividend and interest income will not be subject to Australian income or withholding taxes.
The doctrine of sovereign immunity only applies to foreign governments and their instrumentalities that engage in governmental functions. In determining whether a particular activity constitutes the performance of governmental functions we need to examine the nature of the activity conducted by the foreign government or its instrumentality. This approach is consistent with the decision of the British House of Lords in the case I Congreso del Partido [1981] 2 All ER 1064 which held that activities of a trading, commercial or other private law character were not governmental functions.
The foreign government agency is engaged in exercising governmental functions and therefore is eligible for exemption from Australian income tax including withholding taxes in relation to dividends, interest and capital gains received.
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